Pursuant to the propositions revealed by ARB an entity will not be allowed to acquire allowances and hold them in its own holding account on behalf of another entity. This rule will have an absolute character and, as opposite to the current rules, will not provide for any exceptions.
‘Discussion Draft - March 30, 2012 Amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms to Allow for the Use of Compliance Instruments Issued by Linked Jurisdictions’ has been published by the California Air Resources Board. Stakeholders are invited to review and provide comments on the proposed amendments by April 13, 2012.
Those comments can be electronically submitted at:
Generally the intention is to initiate the rulemaking for amendments to the Cap-and-Trade Regulation (Regulation) to allow for the use of Quebec issued compliance instruments for meeting the compliance obligation by entities in California.
The list below provides a summary of the substantive proposed amendments:
- Allow entities complying with Quebec’s regulation to use California GHG allowances and offsets
- One auction in 2012, on November 14
- Know-your–customer requirements for account registration
- Consolidated accounts for corporate affiliates
- Increase of number of individuals associated with a set of accounts
- Additional detail around auction process
- Removal of beneficial holdings provisions
- Purchase limits for all covered entities
- Changes to Holding Limit for Future Vintage allowances
- Process for adjustments to the Holding Limit Exemption
- Adjustments to compliance instrument transfer process
Provisions on beneficial holding disclosure requirements mostly cancelled
The wide scope of the proposed amendments and the separate problem of linking notwithstanding, in the first place it is noteworthy to observe the important fact that the California cap-and-trade scheme retreats from detailed provisions on beneficial holdings disclosure requirements (see: Beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade) which are currently specific to this emission trading scheme. As ARB staff explains the provisions on Know-Your-Customer checks that substitute for the previous rules are similar to that existing in the EU ETS.
Any individual listed by the registering entity in its registration application in a capacity requiring access to the tracking system must comply with the Know-Your-Customer requirements pursuant to newly proposed provisions before access to the tracking system will be granted.
While the provisions on ‘Disclosure of Beneficial Holding Relationships’ are now replaced with ‘Know-Your-Customer Requirements’, the California Air Resources Board explains that the section ‘is still under development’. ARB adds furthermore that ‘Staff has provided a framework for the types of information that may be required as part of the ‘Know-Your-Customer’ process. This requirement will ensure that individuals who apply for accounts really are who they claim to be. This is critical to the integrity and security of the tracking system. Most of the requirements being considered are similar to the requirements in the registration process for the European Union Emissions Trading System. Staff is also considering disallowing individuals from having accounts if they have been convicted of certain activities (securities theft, fraud, moral turpitude) within the previous ten years. Should ARB request notorized copies of the valid government identification or background checks? Stakeholders are encouraged to share their thoughts on these requirements.’
So, consequently the definitions of the “Agent” (being in a beneficial holdings relationship the registered entity acquiring and holding compliance instruments to be transferred to another entity under an agreement disclosed to ARB), “Beneficial Holding” (meaning the acquisition and holding of compliance instruments by a registered entity to be transferred to another registered entity under an agreement disclosed to ARB) and “Principal” (the registered entity in a beneficial holding relationship to which compliance instruments will be transferred by an agent under an agreement with the principal that is disclosed to ARB) as well as the detailed rules described in Beneficial holdings disclosure requirements for emissions agents under the California cap-and-trade are proposed by the ARB to be deleted.
Finally, the provisions stipulating
‘An entity cannot acquire allowances and hold them in its own holding account for another entity, except when part of a disclosed beneficial holdings relationship.’
‘A registered entity acquiring a compliance instrument on behalf of another registered entity not part of a disclosed beneficial holdings relationship must designate the holding account of the second entity as the destination account in the transfer request.’
have been substituted by more concise form that doesn’t refer to any exceptions
‘An entity cannot acquire allowances and hold them in its own holding account on behalf of another entity.’
It can be considered as an amendment of major importance to market participants, particularly taking into account the rules currently in force.
The second key issue and the ignition of the significant tendency is the linking of the California and Quebec cap-and-trade schemes.
Generally, once a linkage is approved, a compliance instrument issued by California may be used to meet a compliance obligation within the approved external GHG ETS and, mutually a compliance instrument issued by the linked jurisdiction may be used to meet a compliance obligation in California.
As regards linking there may occur some ambiguities with respect to place for registration of market participants. In that regard the proposed amendments stipulate that when California links to an external GHG ETS, an entity must register into a jurisdiction based on the location information the entity must provide during registration. Thus:
(1) An entity located in the United States may only register with California.
(2) An entity located in Canada may only register with a GHG ETS operated by a Canadian province to which California has linked.
(3) An entity located outside of the United States and Canada may register with California or any GHG ETS operated by a Canadian province to which California has linked.
(4) California will recognize the registration of an entity that registers into an external GHG ETS operated by a Canadian province to which California has linked.
When it comes to technical issues, the amended rules provide that the administrator of the approved external GHG ETS must agree to inform the ARB Executive Officer of the serial numbers of any California compliance instruments that the external GHG ETS accepts for compliance and the ARB Executive Officer will agree to inform the appropriate official in the approved external GHG ETS of the serial numbers of any compliance instrument accepted by California for compliance.
But the reciprocity is not secured in its entirety. One of the instances is the issue of the access to the sale of allowances from the Allowance Price Containment Reserve (the detailed rules for the functioning of the Reserve are analysed in The Cost Containment Mechanisms in the California Cap-and-Trade Program – why absent in the EUETS? .
There has been the rule so far that if California links to an external greenhouse gas emissions trading system (GHG ETS), the linkage agreement will specify whether covered entities in the linked GHG ETS will be eligible to purchase from a jointly operated Reserve, or whether each GHG ETS will operate separate Reserves.
This alternative is resolved in the proposed amendments in favor of the latter option and now the provision is inserted stating clearly that if California links to an external GHG ETS, entities registered in the linked GHG ETS will not be eligible to purchase from the Reserve.
This is underlined in the next passage of the new rules providing that only entities registered into the California GHG cap-and-trade system are eligible to purchase allowances from the Reserve.